Annual Letter to Clients and Friends

At this time of year, I’m excited to share an annual letter to my clients, friends, and family as a resource to keep you informed about important developments within the housing market and how they may impact one of your most significant investments—your home. I believe there is no greater investment in most people’s lives than their home, and I feel a deep responsibility to keep you up to date on the trends as we look forward to the months and years ahead.

As another year comes to a close, it’s time to look back and reflect on how we’ve navigated yet another 12-month roller coaster ride. If you’re like me, it feels like we’ve been passengers on this ride since early 2020, with no signs of stability in sight.

While it would be easy to dive into in-depth analyses and forecasts covering the myriad of economic issues we’re facing on a global scale, my goal with this letter is to keep things simple, relevant, and focused. I want to provide you with clear insights into the continuous changes shaping the housing market as we approach a significant period for the economy, especially with the election in the rearview mirror.

So, without further ado, let’s explore what’s happening in the housing market, what it means for you, and what changes we may see as we move into the new year.

As we close out this year and look toward 2025, it’s clear that the U.S. housing market has experienced an unprecedented stretch of volatility. Over the past four years, we’ve witnessed historic highs and lows, from surging home prices to a broad range of interest rates, spanning record lows around 2% to recent peaks above 8%. In this fluctuating landscape, one constant has been the persistent, historically low inventory of available homes, a factor that continues to put stress on home buyers nationwide.

This scarcity of housing has created a unique market dynamic, giving sellers substantial leverage and leaving buyers with limited options. Although experts have predicted a potential market correction for years, a significant downturn has yet to materialize. Instead, the housing market has shown resilience, even as economic shifts and fluctuating interest rates have tested buyer confidence and affordability.

Preparing for What’s Ahead in 2025

Looking ahead to 2025, many wonder if stability might finally re-enter the market. Will this be the year that brings more predictable conditions? While signs of improvement are beginning to emerge, challenges remain. Interest rates, for instance, may not stabilize as quickly as buyers hope. Though recent shifts have hinted at a leveling off, economic factors and potential Federal Reserve actions could keep rates in flux, making it challenging for buyers to secure financing at the levels they desire. As we enter the new year, interest rate volatility remains a key factor impacting buyer sentiment and affordability.

Another factor influencing the market is the ongoing challenges faced by home builders. Builders continue to struggle with high material costs, limited availability of essential supplies, and labor shortages. These challenges mean that construction likely won’t ramp up at a pace sufficient to meet demand in the near term. The availability of skilled contractors and labor workers is another hurdle, one that experts say may take several years to address. Consequently, the supply of new homes is expected to remain constrained, reinforcing the pressure on existing inventory.

Moreover, housing prices are unlikely to decrease in the short term. Low inventory paired with steady demand suggests that prices will remain elevated. Even with interest rate fluctuations, the fundamental supply-and-demand imbalance means buyers can expect to see relatively high prices persist, as limited options keep competition intense. For sellers, this environment continues to offer strong market leverage, while buyers may find themselves paying a premium for available homes.

In this letter and forecast, we’ll explore how these factors—interest rates, construction challenges, and inventory constraints—could shape the housing market in the year ahead. Whether you’re a prospective buyer, a homeowner considering a sale, or simply interested in the real estate landscape, we’re here to help you navigate these complex dynamics and make informed decisions as we step into 2025.

Thank you for trusting us as your resource for all things real estate related. Let’s explore what the next year may have in store.

The Role of Interest Rates and Buyer Demand

Interest rate volatility has been one of the housing market's most influential factors over the past few years. When rates started rising in 2022, it seemed inevitable that housing prices would drop. Although prices briefly dipped, they quickly rebounded, ultimately reaching new highs and defying many early predictions. Throughout 2024, rates continued to fluctuate, at times reaching levels that discouraged potential buyers from entering the market.

Economists now anticipate a period of rate stabilization, with projections for a gradual decline through Q1 and Q2 of 2025. Rates may settle around 6% or lower, a level that could significantly impact buyer confidence, especially as economic stability strengthens and political uncertainties subside. Lower rates would make homeownership more affordable and might spark renewed interest from sidelined buyers who hesitated when rates were higher.

This potential rate drop could particularly impact first-time buyers who have faced challenges entering the market. Rising mortgage rates over recent years limited purchasing power for many, especially for those with limited savings. If rates decrease as expected in 2025, we may see a surge in buyer activity as more homeowners seize the opportunity to secure favorable financing. This, in turn, could create a more competitive market, especially in areas with already limited supply.

Inventory Levels and Market Imbalance

Inventory constraints have defined the housing market in recent years, contributing to price appreciation despite fluctuating demand. National housing supply has remained low over the past five years, primarily due to a combination of institutional investments, high demand, and limited new construction. This imbalance between supply and demand has kept prices high, even amid economic uncertainty, as buyers compete for a limited number of homes.

In 2024, however, we saw promising signs of improvement, with a slight increase in inventory compared to recent years. Although inventory remains low by historical standards, this gradual rise suggests a potential shift toward a more balanced market. If these inventory gains continue into 2025, they could help stabilize prices, making homeownership more attainable for a wider range of buyers.

The recent election could play a role in inventory trends as well. Election years often bring a temporary slowdown as buyers and sellers assess potential policy changes. However, historical data shows that the housing market typically experiences a “post-election bounce,” with increased sales activity following Election Day. Past elections indicate that home sales have risen in the year following nine out of the last eleven presidential elections. This trend suggests that 2025 could bring a renewed wave of market activity as political uncertainties fade. As sellers feel more confident listing their homes and buyers become more active, we could see a continued improvement in inventory levels.

Demand Driven by Population Growth

Population growth remains a significant factor shaping housing demand. Over the past two decades, the U.S. population has grown steadily, and migration levels have recently reached record highs. This influx of new residents means demand for housing remains strong, particularly in regions experiencing rapid population growth. Urban and suburban areas, in particular, face heightened pressure to accommodate new residents, leading to increased competition for available properties.

For many cities, population growth creates both challenges and opportunities. On one hand, growing demand supports local economies, driving job growth and investment in infrastructure. On the other hand, the increased need for housing strains the availability of homes, pushing prices up and impacting affordability. Even if rates decline in 2025, demand pressures may persist in high-growth areas, making it challenging for local markets to achieve true balance.

This ongoing growth intensifies the need for new construction, particularly in regions where housing supply remains limited. Some areas have made efforts to expand their housing stock, yet many markets struggle to keep pace with population increases. Land availability, zoning restrictions, and regulatory hurdles can further limit new construction in high-demand areas, making it difficult to build enough homes to meet demand.

New Construction and Supply Chain Challenges

New construction remains an essential solution to housing shortages, yet the industry faces substantial challenges. While supply chain disruptions have eased since the peak of the COVID-19 pandemic, the construction sector continues to deal with high material costs, labor shortages, and regulatory constraints that make new projects challenging and expensive to undertake.

The pandemic exposed vulnerabilities in global supply chains, disrupting the production and delivery of essential materials such as lumber, steel, and concrete. These disruptions led to construction delays and increased costs, making it difficult for builders to complete projects on schedule. Although supply chains have improved, lingering bottlenecks and material shortages still impact construction timelines and costs.

In many urban and suburban areas, limited land availability and strict zoning regulations further complicate new developments. Builders are often unwilling to pursue projects if the initial revenue projections appear unsustainable, which has contributed to the ongoing “squeezing” effect in the housing market. If global supply chains stabilize further in 2025, there is hope for a modest increase in new construction activity, particularly in high-demand areas. However, the broader market impact may take time, as new projects must navigate regulatory hurdles and limited resources.

Election Effects on the Housing Market

Election cycles frequently introduce a period of uncertainty, influencing the housing market as buyers and sellers pause to observe political changes. While these immediate effects are often minimal, the market typically experiences a brief slowdown leading up to Election Day as potential buyers and sellers reassess their real estate decisions.

Historically, however, the housing market tends to rebound post election. Data from the Department of Housing and Urban Development (HUD) and the National Association of Realtors (NAR) indicate that home sales have increased in the year following most presidential elections. This historical trend suggests that 2025 could bring renewed market activity as political uncertainties diminish. Sellers who held off listing their properties in 2024 may feel more confident moving forward, while buyers could benefit from increased options as new listings enter the market.

Interest rates also tend to fluctuate around election periods, further impacting housing demand. If rates continue to decline in early 2025 as experts predict, homeowners may be more inclined to list their properties, boosting inventory and giving buyers more options. Lower rates could make homeownership more affordable, attracting more buyers and creating favorable conditions for the housing market in the new year.

Our Predictions for 2025

Looking forward, several trends suggest that the housing market could become more balanced in 2025. If interest rates decline as predicted, we may see increased buyer activity, especially among those waiting for more favorable financing conditions. Lower rates could also encourage homeowners to sell, contributing to a gradual rise in inventory and providing buyers with additional choices.

Inventory levels, too, will play a key role in shaping the housing market in 2025. While overall supply remains low by historical standards, the increase seen in 2024 is promising. If inventory continues to rise, it may help stabilize prices, making homeownership attainable for a broader demographic. A more balanced supply-and-demand dynamic would reduce the likelihood of rapid price appreciation and ease affordability concerns, creating a more sustainable environment for both buyers and sellers.

Population growth will likely continue to drive demand, especially in high-growth areas. While new construction could help alleviate some of this pressure, these projects will take time to complete and impact the market. In the meantime, high-demand areas may continue to experience price pressures as they accommodate growing populations. However, the potential for increased inventory and favorable financing conditions could create opportunities for buyers, particularly in regions expanding their housing supply.

A More Stable Market on the Horizon?

As we enter 2025, the U.S. housing market appears poised for a period of potential stabilization. Although challenges remain, the combination of declining interest rates, rising inventory, and sustained demand suggests a path toward balance. For buyers, lower rates and increased options could make homeownership more accessible, while sellers may benefit from an active market driven by increased buyer confidence.

While the market may not achieve perfect equilibrium immediately, the trends observed in recent months indicate a shift toward sustainability. Moving forward, staying informed on interest rate forecasts, inventory trends, and local conditions will be essential for anyone planning to buy or sell in 2025. With cautious optimism, we look to the new year as a time of opportunity and change for the U.S. housing market.